Paxos has agreed to pay $48.5 million to the New York Department of Financial Services (NYDFS) in order to settle allegations related to inadequate due diligence on its former partner, Binance, and failures in its anti-money laundering program. The NYDFS conducted a probe and found that Paxos lacked proper oversight and controls in its partnership with Binance, resulting in the first orderly wind down of a stablecoin. As part of the settlement, Paxos will pay a $26.5 million fine and invest $22 million in its compliance program. The company, which was licensed in 2015 as a limited-purpose trust company, had entered into a partnership with Binance to issue, market, and distribute the BUSD stablecoin. However, the NYDFS found that Paxos did not have adequate controls in place to monitor for illegal activity on or through the exchange, and failed to escalate red flags to its senior management and board. The investigation also revealed that Binance’s lax geofencing allowed users in the U.S. to access its unlicensed exchange, resulting in approximately $1.6 billion in transactions linked to criminal activity. In addition to its shortcomings with Binance, the NYDFS also found that Paxos had been running a weak compliance program for years, with unsophisticated KYC procedures and a poor transaction monitoring system. The company has since rebranded itself as a compliance-focused blockchain infrastructure provider and has stated that the issues identified have been fully resolved and did not impact customer accounts. Paxos continues to operate other regulated stablecoins, including USDP and PYUSD.
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